Articles
8 November 2019

Encouraging news from the trade front

Markets rallied earlier this week on signals that a de-escalation of the trade war is in the making. But risks are still tilted to the downside

President Donald Trump shakes hands with Chinese President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, Japan
President Donald Trump shakes hands with Chinese President Xi Jinping during a meeting on the sidelines of the G-20 summit in Osaka, Japan
Source: Shutterstock

Optimism prevails

Although it has not been the prime focus of attention, US Commerce Secretary Wilbur Ross’s optimism last weekend that tariff hikes on European car imports can be avoided, signals that serious steps are being taken towards a de-escalation of the trade quarrel between the US and EU. According to Ross, there is hope that plans by European car makers to invest in the US will bear enough fruit to make higher import tariffs unnecessary.

Most of the recent market optimism, however, has been fuelled by the increasing chance of a mini trade deal between the US and China. There are still hurdles to be overcome but it is encouraging that, contrary to last spring, Chinese negotiators are sending more positive signals, as well their US counterparts.

The fact that President Trump has decided to go along with a partial deal, despite his earlier statements, is a positive sign in itself. Until recently, he said that he was only interested in an all-encompassing deal, which would be much more difficult to achieve.

This change of mind shows that Trump, as we forecasted earlier, has entered the concession phase. He needs a deal to show the American people that he can deliver on his promise to improve the terms of trade for the US ahead of the 2020 presidential election.

Last hurdles in negotiations are toughest

Having said this, it should be noted that there is still work to do. It is not yet clear whether the alleged concessions from China regarding its exchange rate policy, its policy to protect foreign intellectual property and its increase in agricultural imports from the US, will be enough to satisfy the US administration and the Republicans and Democrats in Congress. Quite a few members of Congress from both parties are afraid that Trump is giving in too much simply to be able to claim a win. Trump will be wary of cutting a deal that can be easily characterised by the Democrats as pure window-dressing with no real substance.

Even if the Chinese concessions have enough clout to potentially convince Congress, the question remains, what price is the US willing to pay? China is demanding that the US not only cancel the tariff hike planned for mid-December, but also undo a significant share of the US tariff hikes that have been implemented since the start of the trade war. Chinese officials said today that there is an agreement with the US to roll back some of the mutual tariffs hikes. How many will be rolled back depends on the final content of the mini deal, they say.

Tariffs still a potential deal breaker

While this is a positive development, the scaling back of tariff hikes could still turn out to be a deal breaker. If the US considers the mini deal as no more than a limited first step towards a phase two deal which would resolve the more difficult issues, it will want to keep the pressure on. Without sufficient tariffs in place, China's willingness to cooperate in follow-up negotiations on tough issues like reducing Chinese state subsidies, diminishing 'forced' technology transfers and scaling down its ambitions to conquer global tech markets, could be in short supply, according to the hardliners on Capitol Hill and in Congress.

Nevertheless, we do expect a phase one deal to be struck soon, which means that things are moving in the right direction. Although risks are tilted to the downside, this increases the chances that our base case, a broader agreement, will be struck around the end of 1Q 2020.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).